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Wednesday, May 23, 2007

A Prescription For Dollar Weakness

Reuters reports on currencies. "The dollar fell on Wednesday after minutes from a Bank of England policy meeting and strong data on euro zone industrial orders suggested interest rates in Europe could rise more than previously thought. The pound surged against the dollar after the BoE minutes showed that, contrary to expectations, the central bank's decision to raise rates this month was unanimous, and some members even had considered a half percentage point rise."

"'There's been a complete readjustment of interest rate expectations that caught everyone flat-footed, and now you're starting to see some short covering and the dollar strength that we've seen getting reversed,' said Boris Schlossberg, senior currency strategist at DailyFX.com."

"By late afternoon, the euro was trading at $1.3458, up 0.1 percent but off an earlier session high of $1.3502. Sterling was up nearly 0.6 percent at $1.9857, having rallied more than 1 cent after the release of the minutes."

"Elsewhere, the Canadian dollar hit a 29-1/2-year high of 1.0817 to the U.S. dollar, extending a rally driven by rising oil prices and a bidding war by foreign suitors for Canadian companies in the natural resources sector."

"But the dollar still faces a rough road ahead, said Alex Beuzelin, market analyst at Ruesch International in Washington. 'While the market has ratcheted back expectations of U.S. rate cuts, the euro zone and UK numbers today suggest higher rates there, and that's a prescription for renewed dollar weakness,' he said."

The Associated Press. "Gold and silver futures rose in light trading conditions Wednesday, boosted by a softer U.S. dollar. June gold settled up $2.70 at $662.60 a troy ounce on the New York Mercantile Exchange. July silver settled up 11.5 cents at $13.105."

"'You have the dollar coming back down, which is supporting the precious metals,' said Michael Gross, broker and futures analyst with Liberty Trading."

"July platinum settled up $8.30 at $1,307 an ounce. June palladium settled down $1 at $377.55."

From MarketWatch. "'Although far from being out of the woods, gold enjoyed a more constructive mid-week session as light buying emerged on the back of a marginally declining U.S. dollar against the euro,' said Jon Nadler, metals analyst at Kitco Bullion Dealers."

From Bloomberg. "Former Federal Reserve Chairman Alan Greenspan said he was concerned Chinese stocks might undergo a 'dramatic contraction' after its main stock index jumped more than 90 percent this year."

"The benchmark CSI 300 Index, which tracks yuan-denominated A shares listed on China's two exchanges, rose to a record 3938.95 today. The index more than doubled last year as investors bet corporate profits would be boosted by the world's fastest-growing major economy."

"'It is clearly unsustainable,' Greenspan told a conference in Madrid today by satellite. 'There is going to be a dramatic contraction at some point.'"

"China last week increased the amount it lets the yuan move against the dollar and raised interest rates to restrain economic growth and a swelling trade surplus. U.S. lawmakers said the steps weren't enough to forestall legislation to punish China for maintaining what many charge is an artificially cheap yuan to stoke exports."

"Greenspan today said the global financial system remains resilient. 'I am not worried about the system overall, but I am worried about some parts,' he said. 'I am concerned for example about China.'"

From CNN Money. "Cheap debt has never flowed as freely as it does now, but the credit boom won't last forever, experts say. 'The numbers have gotten so big and there is such a lack of recognition of risk. Whenever you go this far, things tend to turn out very badly,' said David Tice, manager of the Prudent Bear funds."

"Defaults are likely to mount quickly if a notable company unexpectedly collapses, says Sean Egan, managing director of independent ratings firm Egan-Jones. 'It has to be a major company, it could be an auto company that has difficulty with cash flow - in order for it to really be a drag on the market,' he said."

"While the economy has slowed, fundamentals still remain strong, said Eric Takaha, director of high-yield research and portfolio manager for Franklin Advisers. 'We don't see a dramatic surge in defaults in the near future; there just aren't enough companies that are close to the edge,' he said."

"Hedge funds have become important lenders in the booming market for leveraged loans, those loans given to highly-indebted companies. Leveraged loans have ballooned amid the buyout frenzy and keep growing. Leveraged loan volume surged to $183 billion in the first quarter, up 55 percent from the same period a year ago, according to Standard & Poor's."

"But many of these hedge fund lenders haven't experienced the ups and downs of the credit cycle, and it's unclear how they will react when market conditions take a turn for the worse, industry watchers said."

IMO, should there be a shake-up in global credit markets, it should cause a big roll back in the carry-trade. In that case, the yen and the Swiss franc should make big gains, with falls where the CT money is stashed; Australia, New Zealand, Vietnam and possibly China.

Remember that little scare in China stocks earlier this year? Check out the yen and how it keeps trying to get back to those highs.